Buffett stake in Dow may be ending
Warren Buffett could soon have to bid adieu to another of his high-yielding investments from the financial crisis.
Dow Chemical Co. shares rallied past $53.72 Wednesday for the first time in nine years. If they close above that price for 20 trading days in a 30-day window, the chemical maker can convert Buffett's $3 billion preferred stake into common stock. The stock closed Wednesday at $53.89.
Swapping the shares would cut dividend payments that Dow has been paying since it turned to Buffett's Berkshire Hathaway Inc. to help finance a takeover in 2009 of Philadelphia-based Rohm & Haas Co. The billionaire investor went on a deal-making spree during the credit crisis, lending billions of dollars to companies including Goldman Sachs Group Inc. and General Electric Co. at historically high rates.
"He built the ark before the storm came up," Luke Sims, chairman of Sims Capital Management, said of Buffett. Having cash during a crisis "and staying power gives you many, many opportunities."
Dow has kept offices near Independence Hall that Rohm & Haas used to occupy, and has a big operation in Collegeville, Montgomery County.
Buffett's preferred stake is particularly expensive for the chemical maker, with interest rates now near record lows. The securities have an 8.5 percent yield, entitling Berkshire to $255 million in dividends annually. Kuwait's sovereign wealth fund also helped finance the Rohm & Haas purchase and holds $1 billion of the securities.
Converting the preferred stock would be a milestone for Dow chief executive officer Andrew Liveris, who has come under pressure this year from hedge-fund manager Dan Loeb to boost the company's share price. While defending his strategy, the CEO has increased the common stock dividend, announced buybacks, and expanded a program to divest underperforming units.
The actions and higher earnings have helped send Dow shares up 21 percent this year, the second-best result in the 16-company Standard & Poor's 500 Chemicals Index. The company reported second-quarter earnings Wednesday that beat analysts' estimates on expanding margins.
A boom in U.S. natural gas production since the recession has lowered ingredient costs for Dow and helped boost profit. Net income last year was $4.41 billion, up from $336 million in 2009.
Some of Buffett's other crisis-era investments have been wound down. In October, Mars Inc. said it repaid $4.4 billion in bonds that Berkshire bought to help the candy maker acquire William Wrigley Jr. Co.
That month, Buffett received common equity stakes in Goldman Sachs and GE to settle warrants he received under deals five years earlier. Berkshire committed a combined $8 billion to the companies in 2008 to help them shore up capital and restore market confidence after Lehman Bros. Holdings Inc. collapsed. Both Goldman Sachs and GE repaid the money at a premium in 2011.
The redemptions have caused Berkshire's cash pile to swell at a time when fixed-income investments have historically low yields. Buffett has responded by pursuing acquisitions, like last year's purchase of the largest electric utility in Nevada.